10 Jan 3 Reasons Not to Payoff Your Loan Early

3 Reasons Not to Payoff Your Loan Early

I promise I’m not trying to trick you into paying more interest. This is probably the opposite of what you have been told to do by everyone. Believe me though; there are some scenarios in which you would benefit more from paying a loan through to term.

Generally speaking you will save more money by paying off a loan early. The situations in which you don’t want to pay it off early will be fairly specific situations. So pay close attention and always do your own homework before committing to any financial decision.

1. Prepayment Penalty

Many loans, mainly installment loans (think auto loans or a mortgage) come with a prepayment penalty written into the contract. This allows a lender to assess a fee to you when paying off a loan early. While nobody likes fees, these in particular are designed to ensure the lender meets a minimum amount of revenue when distributing a loan. Loans cost time and money to write, so the lender wants to ensure they get something back in return.

The prepayment fee can offset the benefit to paying a loan off early, as they are generally a few hundred dollars. This won’t always be the case however, and you may have to do a bit of math to figure it out. Save yourself some time and use this Bankrate calculator to see how much interest is left to be paid on the loan. If the amount of interest you will pay to get past the prepayment penalty threshold (they usually expire after so many years/months of the loan) is greater than the fee you will pay – then go ahead and payoff your loan early. If it isn’t, make the necessary payments required and then take care of it.

2. You Lack or Have Bad Credit

If you lack or have bad credit history but are paying on a loan, you more than likely have a higher interest rate. Bad credit loans are available but typically come with a higher interest rate because the institution sees you as a higher risk. In order to get offered better terms in the future, you will need to build or rebuild your credit history to get a higher score. One of the best ways to do this is by demonstrating positive or on-time payments.

Again, this one will be situational. If you are in a position where every dollar counts, then it may make more sense for you to pay off the loan early to save money. With this situation, paying on the loan longer is actually going to cost you more because you will pay all of the interest on it. However, for those of you who could afford the loan in the first place and are struggling to build credit, this may be your opportunity to do so.

3. You’re Going to Re-Borrow It

If you haven’t thought through the decision to pay off the loan, then perhaps you need to take a step back. Make sure you are able to pay off the loan while still keeping on track with your monthly budget.  Having a budget is a good idea in the first place. There is an easy and free one at MINT that you can use if you don’t already have one setup.

You should be 100% sure of your ability to pay off the loan without incident before you do so. Not only does re-borrowing the loan defeat the purpose, it also increases expenses. Think about it. More often than not, if you are taking out a new loan or payday loan (because it’s time sensitive), you are probably paying another application or loan document fee to get the loan. Not only that, you are also restarting the amount of interest that you will be paying on it.

CONCLUSION:

Most of these are clearly situational, but should they apply we reccomend  you at least give it some thought. While you definitely don’t want to stay in debt any longer than you have to; you always want to make sure you have thought the longer term consequences through to make sure it is the right choice for you.

There will also be some circumstances where you literally can’t get out of a loan fast enough. Whether it was a bad credit loan or payday loan you took out due to an emergency, we often reccomend refinancing those if at all possible to avoid the excessive costs.

If you found this article while in a similar position, we encourage you to apply for Credit Fair-E loan, to see if we can help put you in a better position. There are fair loans for people with bad credit.

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